Following the stand-off between the environment and coal ministries regarding the coal block for the ultra-mega power project, the PMO is likely to step in to resolve the issue

The Prime Minister's Office (PMO) is likely to take the final decision on the fate of the 4,000-MW ultra mega power project (UMPP) at Sarguja in Chhattisgarh, which has been delayed due to the non-receipt of environmental clearance, reports PTI.

The environment and forests (E&F) ministry has declared the Hasdeo coal block in Chhattisgarh—which was allotted by the coal ministry for the Sarguja UMPP—as a 'No Go' area, where coal mining cannot be done as it will adversely impact the environment.

The coal block was awarded by the ministry of coal to the ministry of power for captive use of the 4,000 MW UMPP in the state.

"As the matter has now become inter-ministerial, it may go to the PMO," a source close to the development said. He did not provide any further details on the matter.

The environment ministry has maintained that it was not consulted by the coal ministry before the coal block was allotted.

"The coal ministry should have consulted the environment and forest ministry before allotting the coal block," an official in the E&F ministry said.

Power Finance Corporation (PFC), the nodal agency for the ultra-mega power project, invited preliminary bids for the execution of the Sarguja project in March this year. The last date for submission of bids was 3rd May, which has now been extended till 5th July due to objections raised by the ministry of environment and forests.

PFC forms a special purpose vehicle (SPV) for all the UMPPs, the SPV acquires the land, provides water availability and coal linkage for the project.

Sarguja is the fifth UMPP in a series of such projects planned by the power ministry.

The government has already allotted four UMPPs to the successful bidders. Reliance Power has bagged three of the four UMPPs at Sasan (MP), Krishnapatnam (AP), and Tilaiya (Jharkhand), while Tata Power has been awarded the Mundra UMPP in Gujarat.

These projects are likely to provide a thrust to the government's capacity addition programme in the Twelfth Five Year Plan, starting April, 2012.

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The RBI late Wednesday allowed banks to draw additional funds from it by opening a second window to meet the expected cash crunch in the system on account of Rs1 lakh-crore demand of corporates to meet their 3G fee and advance tax payment requirement

The Reserve Bank of India (RBI) late Wednesday allowed banks to draw additional funds from it by opening a second window, to meet the expected cash crunch in the system on account of Rs1 lakh-crore demand of corporates to meet their third generation (3G) fee and advance tax payment requirement, reports PTI.

At present, RBI offers only one window—the Liquidity Adjustment Facility (LAF)—to banks between 9.30 am and 10.30 am everyday to lend or borrow from it against government securities.

The central bank manages daily money supply in the system through LAF.

Starting from May 28, the apex bank will allow banks to avail of the second such measure for half an hour between 4 pm and 4.30 pm.

The facility will allow banks to borrow more from the central bank to the tune of 0.5% of their deposits.

In the first LAF of the morning hours, banks can borrow or lend as much as their requirements. However, RBI sees money supply in the system before accepting or rejecting their demands.

The second window may inject up to Rs25,000 crore—0.5% of the total bank deposits of Rs50 lakh crore at present.

"Scheduled commercial banks may avail of additional liquidity support under the LAF to the extent of up to 0.5% of their net demand and time liabilities," the Reserve Bank said in a statement.

Banks towards the close of the day would know exactly how much is their actual demand for cash after taking money from each other in the call money market.

The central bank also allowed banks to seek waiver of the penal interest if they have less government securities when they borrow more from the RBI.

At present, banks are required to have 25% of their deposits in government securities, cash and gold (statutory liquidity ratio or SLR).

"For any shortfall in maintenance of SLR arising out of availment of this facility, banks may seek waiver of penal interest," the RBI said.

Terming the measure as temporary, RBI said the facility would be available till 2nd July this year.

Earlier, RBI had announced second LAF after funds dried up due to deepening global financial crisis in 2008.

This time, it announced the measure due to pressure on money supply due to expected Rs1 lakh crore payment for 3G auction and advance tax outgo.

The fiercely competitive auction of 3G spectrum, which ended last week, offers Rs67,719 crore to the exchequer, almost double of the Rs35,000 crore projected in the budget.

This together with payments for broadband wireless access (BWA) and expected advance tax for the first quarter of this fiscal may result in Rs1 lakh-crore outgo from the system.

The Rs1 lakh crore demand has raised apprehensions of interest rate hike as it has come on the top of RBI sucking out liquidity and making credit dearer since January.

"The latest assessment of liquidity conditions suggests that there could be temporary liquidity pressures in the market largely due to changes in government balances on account of advance tax payments and 3G auctions," RBI said.

Commenting on the move, Bank of Baroda executive director R K Bakshi said, "Liquidity in the market has really become tight in the last few days. 3G auction taking double the amount which was expected earlier will put pressure in the liquidity in the market...this (RBI's step) will definitely help."

The RBI announcement came a few hours after its deputy governor K C Chakrabarty assured enough liquidity support to make up for any cash crunch in the system.

"Yes, definitely...maintaining adequate liquidity is the job of the Central bank...why the markets should fear," Mr Chakrabarty said on the sidelines of RBI Rajbhasha function in Mumbai.

SBI chairman O P Bhatt also admitted that surplus liquidity is gradually disappearing from the system that has forced it to raise certain segments of short-term corporate loans by 0.25%-0.50%.

However, Mr Bhatt indicated that there would not be general interest rates hike immediately as liquidity is enough despite expected payment for 3G auction and upcoming advance tax.

To a query on whether the 3G money will help the government to cut down its borrowing target, Mr Chakrabarty said that may be a possibility 'if all other things remain the same'.

In Delhi, finance secretary Ashok Chawla also said better than expected revenue generation from 3-G spectrum auction would have favourable impact on the government borrowing plans.

If the government reduces its borrowings from the expected over Rs4.50 lakh crore this fiscal, this may raise the resources available for private sector and may not impact interest rates.

In its annual monetary policy, RBI had asked banks to keep more cash—0.25% of deposits—with the central bank.

It had also raised key short term lending (repo) and borrowing (reverse repo) rates by 25 basis points.

Wednesday’s measure cannot be termed purely as reversal of tight monetary policy by RBI as it is a temporary measure to meet ad hoc cash imbalances of banks.

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Faced with a shortfall of liquidity on the back of expected 3G fee payouts and advanced tax outflows, banks may hike deposit rates, fear some. But this may not happen because government borrowings will come down

The banking system could come under severe strain as a big chunk of banks’ funds is set to flow out in a short span of time, feel some analysts. Funds to the tune of Rs1,00,000 crore could be drained out of bank treasuries in a matter of weeks as companies take out funds to pay advance tax and 3G license fees, fear some. Telecom companies alone will account for borrowings amounting to Rs70,000 crore to be paid to the government as fees for 3G spectrum allocation. Additionally, advanced tax outgo from companies’ bank accounts is expected to touch around Rs30,000 crore-Rs40,000 crore.

Will this sudden outflow of funds lead to a liquidity shortage in the system? If so, this could have a cascading effect on the economy for the short term. First, it could stymie banks’ ability to lend funds to the corporate sector, which has only recently shown some appetite towards credit. Some tightening is evident from the fact that banks yesterday managed to invest surplus funds of only Rs9,000 crore with the RBI under its reverse repo window, compared to the situation last week, when banks had parked Rs47,500 crore under the same window last Friday.

In such circumstances, banks may have to look for various ways and means to bridge the shortfall between demand and supply. Already, banks have resorted to redemptions from mutual funds to shore up their balance-sheets. Others have started raising money by issuing certificates of deposits.

If this liquidity crunch persists, banks would have to hike their deposit rates earlier than anticipated. A banking sector analyst from Anand Rathi believes that deposit rates could go up sooner as higher inflation and stronger credit off-take forces banks to revise the rate structure. “We believe there could be a 50 basis point hike in deposit rates on an average across the system as banks try to deal with a deposit crunch in the face of higher credit off-take. Also, with inflation still at a high level, real interest rates are negative at this point of time. Banks will have to take this factor into account while deciding on how to attract funds.”

Ambit Capital’s V Krishnan believes banks may need to mobilise resources a bit more aggressively by adjusting deposit rates upwards. “Each bank will take a call depending on what visibility they have on the lending side or how advances are going to flow out. They will then have a fair understanding as to how much resources they need on the liability side. If the liquidity corridor continues to be this low, deposit rates will definitely head upwards.”

However, the question remains, is all this temporary? DK Joshi, chief economist at credit rating agency CRISIL doesn’t expect the current liquidity shortfall to last much beyond the near term. “If banks sense that this problem will persist, they may definitely revise deposit rates. But I don’t see it (the liquidity crunch) continuing beyond a point. One must also see that the government will now be borrowing that much less due to the substantial 3G fee income. So, the overall pressure on the liquidity front will not be that large. Although it is a slight shock to the system for the near term, it will not last.” In fact, the economic conditions around the world are softening which may lead to lower demand for bank funds from companies.

Over the short term, banks are expected to continue to flock to the overnight RBI repo window to shore up liquidity. “More and more banks will go to the RBI repo window to access repo funds from the RBI so that they have enough liquidity to lend to their borrowers,” said suggests Mr Krishnan.

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COMMENTS

AVMSUNDARAM

7 years ago

Yes. The liquidity crunch in the banking sector will slowly tighten in the coming weeks as the banks have already lent funds to the telcos on shortterm basis.(CPs). However these telcos have to find funds from longterm sources which will ultimately be from banks and institutions. RBI might temporarily ease out the liquidity crunch by providing LAF. Reduction in govt. borrowings will be reduced to a little extent and this will be known only in the second half of this fiscal. Further with the growth envisaged the govt spending cannot come down and the raising of funds by corporates for their upcoming projects will also compete with the govt borrowings this year. Market will gradually tighten and RBI need not raise or hike rates. Banks investment in mutual funds will gradually reduce this year.